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The day traders all become political analysts

Plenty of news flow for traders to sink their teeth into, including another woeful day’s trade for Deutsche Bank, Twitter takeover speculation ramping up and traders buying volatility ahead of today’s first presidential debate.

The German DAX fell 2.2% with further banking concerns hitting the market. Deutsche Bank fell 7.5%, taking its market capitalisation to $16.37 billion, which many have put into perspective of the Department of Justice's (DoJ) potential $14 billion fine. Consider that they are expected to earn €867 million this year and are effectively beholden to the European Central Bank’s (ECB) policy, which is not favourable given its deeply negative rate policy.

The S&P 500 has fallen 0.8%, with financials and health care the underperforming sectors. Traders have been happy to hedge portfolios, with the US volatility index (VIX) gaining 18%. The US ten-year treasury fell three basis points to 1.59%.

Twitter pushed up a further 3.3%, adding to Friday's 21.4% spike. We have Microsoft, Salesforce, Alphabet and Disney all potentially eyeing a bid. Recall that Twitter is the fourth largest seller of digital advertising globally (ex-China), so for names like Alphabet, the acquisition makes sense. The net present value (NPV) of any potential investment is the key sell to shareholders though.

In the FX market, all eyes are on USD/JPY, with traders eyeing a test of ¥100.00. The pair has traded to a low of ¥100.24 despite comments from Bank of Japan (BoJ) chief Kuroda yesterday that ‘there is no limit to monetary policy’. Watch for the daily close through the ¥100.00 level, rather than selling the initial break through the figure and getting caught in a likely stop loss run.

AUD/USD traded in a range of $0.7603 to $0.7649. Put AUD/CAD on the radar though, with the pair eyeing a break of the year’s highs. The bulls look firmly in control here, but I would wait for a daily close above C$1.0124 before accumulating long positions.EUR/USD wants to break the May downtrend at $1.1285, so a closing break suggests that long positions are preferred.

It’s unclear if traders bought volatility and portfolio protection due to today’s first presidential debate, but naturally this makes sense. Many of the major policy initiatives and ‘toughest proposals’ (such as financial regulation) won’t see the light of day unless we see one party control both the Senate and House, which seems unlikely. Still, we know three of the key topics today (‘achieving prosperity’, ‘securing America’ and ‘America’s direction’) and it seems that whoever makes Americans feel the safest will do well today.

What we should learn today is how markets genuinely trade each candidate. If Donald Trump emerges as the victor and the USD rallies and S&P futures sell-off, it will provide confirmation of a trade many have already pre-positioned for. So the reaction in markets should be telling today as we head into the 8 November election.

The action kicks off at 11.00am (AEST). Most feel Clinton is the best on paper, but it really depends on which Trump turns up and if he can stick to his advisor’s script!

We are expecting the ASX 200 to open at 5393 (a fall of 38 points or 0.7%). BHP and CBA should open 0.9% and 1% lower respectively (based on their ADRs). Expect good selling in Japanese equities as well.

We should see some of the momentum coming out of the local market on open, with a move sub-5400 expected. The rally that started on 14 September equated to close to 5%, but indecision was seen in the price action yesterday and there was no conviction to push the move higher. The bears will have a greater say today.

The key markets to watch are S&P futures and the USD. With many focusing on USD/MXN and USD/CAD given the ramifications on the Mexican and Canadian economies if Trump dominates the debate and gets a step closer to the Oval Office. USD/JPY is also a must watch for a move into ¥100.00.

But it really is a day where the participant’s gets to sense check market moves against who performs the strongest. Donald Trump is the underdog (on paper), but he knows that. If he sticks to the script and does his homework, he could do well. The fact that there will be no ad breaks makes this uncharted ground for him and there is nowhere to hide if he is found out. He can’t bully Hillary like he did to ‘Little Marco’ or Ted Cruz, so we’ll be watching with fascination on how he plans to dominate and fact check Clinton. Game on.

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